Verbal FX Intervention After 18 Months... How Is This Spring's 1,430 Won Different? [Why&Next]

"High Level and High Volatility" Assessment
Closes at Highest Level Since April 29 (1,437.3 Won)
'1,400 Won as the New Normal' Perspective Spreads, But...
"This Spring Was Different... More Variables to Watch"

Foreign exchange authorities have made a verbal intervention for the first time in a year and a half. This move came as the won-dollar exchange rate in the Seoul foreign exchange market surged by more than 30 won intraday, surpassing 1,430 won within just two trading days after the Chuseok holiday. Judging that volatility was excessive amid high exchange rate levels, the Ministry of Economy and Finance and the Bank of Korea jointly issued a message to expand market monitoring. As a result, the weekly closing price of the won-dollar exchange rate on the 13th settled somewhat at 1,425.8 won. On the 14th, it opened at 1,426.5 won, up 0.7 won from the previous close, and continued to fluctuate around the 1,420 won level.

On the 14th, when the KOSPI reached an intraday all-time high, the status board in the dealing room of Hana Bank in Jung-gu, Seoul displayed the KOSPI, the won-dollar exchange rate, and other indicators.

'Internal and External Troubles'... Korean Won Plunges Sharply Against Global Dollar

Although the situation has calmed compared to the intraday peak of 1,434.0 won, the previous day's closing price was the highest in five and a half months since April 29 (1,437.3 won). At the end of April, the won-dollar exchange rate hit a new yearly high (1,484.1 won on April 9) due to the aftermath of the martial law crisis and escalating US-China trade tensions. Afterwards, concerns over economic burdens from high tariffs led to dollar weakness and a gradual decline in the exchange rate.

In May this year, expectations for a weaker dollar and stronger Asian currencies led the won-dollar exchange rate to gradually decline, reaching 1,380.1 won by the end of May. The dollar index (DXY), which measures the value of the dollar against six major currencies, also dropped from near 110 at the start of the year to 99.33 during this period, reflecting the relative strength of the won. The current dollar index is at a similar level. Despite similar global dollar conditions, the won has fallen by more than 3.3% compared to May.

In both May and June, the daily average fluctuation range was large, at 7-8 won, though the overall level was lower. As the dollar index fell to 96.88 at the end of June, the won-dollar exchange rate also dropped to 1,350.0 won. After that, the rate fluctuated within the mid-to-high 1,300 won range. Recently, however, mounting uncertainty over US investment negotiations and the resumption of US-China trade disputes have pushed the exchange rate back above 1,400 won. The daily average fluctuation range has also widened again this month, reaching 7.3 won. Compared to other major currencies, the won has depreciated significantly. Since early August, the won has shown the largest decline against the US dollar among major currencies, with a depreciation rate of -1.74%, compared to the euro (1.64%), the British pound (1.04%), and the Japanese yen (-0.78%).

'1,400 Won as the New Normal' Perspective Spreads, But... "Different from This Spring, Variables Need to Be Checked"

As a result, the view that the 1,400 won level is the "new normal" for the won-dollar exchange rate is spreading. However, analysts point out that the current situation is different from when US-China trade tensions exploded in April. Opinions are divided on whether the won-dollar exchange rate will rise further.

In early April, when US-China trade tensions intensified, the won-dollar exchange rate soared to the 1,480 won range. As concerns about the US economy deepened, the US dollar weakened and the 10-year Treasury yield surged to 4.5%. This was the background for President Donald Trump's decision to postpone reciprocal tariffs. However, this time, both US short-term and long-term interest rates are in a downward phase. Kwon Amin, a researcher at NH Investment & Securities, said, "President Trump is maintaining a tough stance on China, but he has also left room for a summit with China at the Asia-Pacific Economic Cooperation (APEC) summit before the original tariff negotiation deadline of November 1," adding, "It will be difficult to see a shock similar to that of April."

An employee is organizing US dollars at the Hana Bank Counterfeit Detection Center in Jung-gu, Seoul. Photo by Yonhap News.

Although additional upward pressure may be limited, it is expected that fluctuations around the 1,400 won level will be inevitable for the time being. As caution over US investments continues, it is necessary to monitor whether uncertainty surrounding the $350 billion investment in the US persists. Experts say that it will be important to see whether there is progress on key issues, including a Korea-US currency swap, at the bilateral meeting between the Korean and US finance ministers on the 15th. They also noted that the release of the US Consumer Price Index (CPI) for September, scheduled for the 24th (local time), warrants close attention. This will help gauge the future path of US Federal Reserve interest rates.

Nevertheless, forecasts that the average exchange rate will remain above 1,400 won from the end of this year into next year are increasing. Choi Yechan, a researcher at SangSangIn Securities, projected the average won-dollar exchange rate for next year at 1,441 won, citing the vulnerability of the won to capital outflows due to its characteristics as a small open economy, changes in the global trade environment, and large-scale US investment demands. Choi added, "The won-dollar exchange rate will inevitably face upward pressure next year due to US investment. With uncertainties such as changes in trade conditions, interest rate paths, and trade negotiations, volatility is expected to increase."